Monday, July 11, 2016

2369. A Just Transition for U.S. Fossil Fuel Industry Workers

The rift between several major unions and environmentalists over projects like the Keystone XL Pipeline demonstrates clearly what is at stake. Here, hundreds of union workers rally in support of the Keystone XL Pipeline during a Local 798 Rally Tuesday, April 9, 2013, in Tulsa, Oklahoma.

According to the U.S. National Oceanic and Atmospheric Administration, 2015 was the globe’s warmest year since at least 1880, when such figures were first recorded. 2014 was the next warmest, and the hottest five years also include 2013, 2010, and 2005. Can it be any more obvious that we absolutely must stop playing Russian roulette with the global climate?

The two most important things we need to do to stabilize the climate are straightforward. First, the world must dramatically cut its reliance on oil, coal, and natural gas in energy production. This is because carbon dioxide (CO2) emissions generated through burning fossil fuels, along with methane emissions released during fossil fuel extraction processes, are responsible for about 75 percent of all greenhouse gas emissions causing climate change. Second, as the alternative to fossil fuel consumption, again on a global scale, we must massively expand investments in energy efficiency and clean renewable energy sources—solar, wind, geothermal, low-emissions bioenergy, and small-scale hydropower.

Both parts of this climate stabilization program will produce large-scale impacts on the employment opportunities for working people as well as on the communities in which they live. The investments in efficiency and clean renewables will generate millions of new jobs. But workers and communities whose livelihoods depend on the fossil fuel industry will unavoidably lose out in the clean energy transition. Unless strong policies are advanced to support these workers, they will face layoffs, falling incomes, and declining public-sector budgets to support schools, health clinics, and public safety. This in turn will increase political resistance to any effective climate stabilization program.

Coal miners return on a buggy after working a shift underground at the Perkins Branch Coal Mine in Cumberland, Kentucky. As recently as the late 1970s, there were more than 350 mines operating at any given time in Harlan County. In 2014, it's around 40.

It follows that the global climate stabilization project must unequivocally commit to providing generous transitional support for workers and communities tied to the fossil fuel industry. The late U.S. labor leader and environmental visionary Tony Mazzocchi pioneered thinking on what is now termed a “Just Transition” for these workers and communities. As Mazzocchi wrote as early as 1993, “Paying people to make the transition from one kind of economy to another is not welfare. Those who work with toxic materials on a daily basis … in order to provide the world with the energy and the materials it needs deserve a helping hand to make a new start in life.”

In this article, we propose a Just Transition framework for U.S. workers. Our rough high-end estimate for such a program is a relatively modest $600 million per year. This is about 1 percent of the annual level of public investment that will be needed to advance a successful overall U.S. climate stabilization program. As we show, this level of funding would pay for income and pension-fund support for workers facing retrenchments as well as effective transition programs for what are now fossil fuel–dependent communities.

One reason that the costs for this program can be kept relatively modest is precisely because the fossil fuel industry cutbacks will be occurring in conjunction with the growth of the clean energy industry. This is critical because, among other factors, within the U.S. economy, the number of jobs generated by clean energy investments will be much larger than the jobs that will be lost through fossil fuel industry retrenchments. Specifically, spending $1 million on clean energy investments generates about 17 jobs across all sectors of the U.S. economy, while spending the same $1 million on maintaining the existing fossil fuel infrastructure produces only about five jobs. Clean energy investments will produce more jobs for electricians, roofers, steelworkers, machinists, engineers, truck drivers, research scientists, lawyers, accountants, and administrative assistants. One major policy challenge is to locate good jobs in areas that will be hard hit by the decline of fossil fuel businesses.

Developing a viable Just Transition program is a matter of simple justice, as Mazzocchi emphasized. But it is equally a matter of strategic politics. Without such adjustment assistance, the workers and communities facing retrenchment will, predictably and understandably, fight to defend their livelihoods. This, in turn, will create unacceptable delays in proceeding with effective climate stabilization policies. As one stark case in point, in mid-May, the AFL-CIO Building Trades department sent a blistering letter to the federation’s president, Richard Trumka, condemning the AFL-CIO’s newly announced get-out-the-vote alliance with environmental funder and activist Tom Steyer. The broader rift in the U.S. between several major unions and environmentalists over projects that provide union jobs, like the Keystone Pipeline, demonstrates clearly what is at stake.

How Large a Contraction for U.S. Fossil Fuels?

The Intergovernmental Panel on Climate Change (IPCC) provides conservative benchmarks on what’s required to stabilize the average global temperature at no more than 3.6 degrees Fahrenheit (2 degrees Celsius) above the pre-industrial average. A fair summary of their assessment is that global CO2 emissions need to fall by 40 percent by 2035 and by 80 percent by 2050.

Let’s say that U.S. emissions will need to decline at this average global rate, and let’s focus on the 20-year goal of a 40 percent decline. To accomplish this goal will require across-the-board cuts in both production and consumption in all domestic fossil fuel sectors. But cuts will need to be greater for coal. Per unit of energy produced, emissions from burning coal are about 40 percent higher than oil and 50 percent higher than natural gas. In addition, certainly over the next 20 years, it will be more difficult to find substitutes for oil as a liquid fuel in transportation than for coal as a generator of electricity. Given these considerations, we proceed with the assumption that, by 2035, U.S. coal consumption will need to fall by 60 percent, while the cuts will need to be around 40 percent for oil and 30 percent for natural gas.

Other major differences between coal versus oil and gas are also important for our purposes—in particular, the fact that the U.S. coal industry has experienced a sharp decline in profitability over the past decade. The rise of environmental regulations has been only one factor here. Competition from low-cost natural gas, generated through fracking technology, has also caused major losses. The combined impact has been devastating. Bloomberg News reported in January that “coal producers are suffering through a historic rout. Over the past five years, the industry has lost 94 percent of its market value, from $68.6 billion to $4.02 billion.” In addition, half the debt issued by U.S. coal companies is presently in default, and major coal producers Arch Coal, Alpha Natural Resources, and Peabody Energy have all filed for bankruptcy over the past year. This is all before we would begin the 60 percent cut in production over the next 20 years.

Conditions in oil and gas are different. The industry was booming from 2011 to 2014, as crude oil prices hovered around $100 a barrel. But profitability fell sharply as the price of oil declined to less than $60 a barrel in 2015 and less than $40 a barrel in 2016. Plunging oil prices also rendered unprofitable most projects to produce natural gas through fracking. In 2016, defaults on debt by oil and gas companies reached nearly 15 percent. In Texas alone, the industry shed about 70,000 jobs. It is not clear how much of an increase in the oil price would be needed to reverse these negative trends, or whether any such oil price increase is likely to emerge soon. In any case, a 30 percent to 40 percent production cut over the next 20 years will certainly worsen the already unstable situation. What will this mean for fossil fuel industry workers and communities?

Subsidizing Early Retirements

The U.S. government has mounted multiple programs designed to assist workers facing job losses resulting from government policy choices. The most prominent of these is the federal Trade Adjustment Assistance (TAA) initiative, which was first implemented in 1962 and still operates today. The TAA is designed to help workers displaced by shifts in U.S. global trade policies. The program supports wage subsidies, health insurance, counseling, retraining, relocation, and job search. The overall cost is about $10,000 per worker per year, and workers, on average, benefit for about two years. However, the labor movement has long derided this level of funding as paltry, the equivalent of burial insurance.

Similar federal programs have been no more effective than the TAA in relocating displaced workers into good new jobs. Rather, despite such initiatives, displaced workers have been largely shunted into low-wage occupations. For example, a 1999 study by Laura Powers and Ann Markusen on the post–Cold War transition programs such as the Defense Reinvestment and Conversion Initiative found that “a majority of the workers displaced from defense-related industries between 1987 and 1997 now work at jobs that pay them less than their former wages and that fail to take advantage of their defense-bred skills, and a sizable minority has experienced a drop in earnings of 50 percent or more.”

Given this pattern, one cannot be optimistic that the results would be significantly better if similar policies were implemented as one component of the clean energy transition. Fortunately, there is a simple and relatively inexpensive alternative approach that can work. This is to provide a one-year early retirement program for some workers. If we focus on the industry contractions through 2035—60 percent for coal, 40 percent for oil, and 30 percent for natural gas—the needed retrenchments will be only slightly in excess of the normal rate at which fossil fuel–sector workers will be retiring anyway at age 65.

Here are the basic figures. As of May 2015, there were 69,000 people employed in the U.S. coal-mining industry, and 194,000 in oil and gas extraction. This includes the people directly engaged in the mining and extraction work itself as well as everyone else doing all kinds of jobs involved in producing coal, oil, and natural gas, ranging from office support to top-level executives. The adjustment assistance program would apply across the board to all employees in both industries, regardless of occupation.

Starting with the coal industry, let’s assume that production does decline by 60 percent over a 20-year period. This means that the industry will shed about 41,000 jobs over the next 20 years. That averages out to about 2,100 job losses per year in the industry.

There are 28,000 workers in the coal industry between the ages of 45 and 64. This translates to an average of 1,400 workers retiring per year over the next 20 years. In other words, two-thirds of the 2,100 jobs that have to be shed per year in the coal industry will happen through natural attrition via retirements at age 65. But that does still leave nearly 700 jobs that need to be shed by workers who would not have reached the standard retirement age of 65.

These additional job cuts can be handled simply by providing a fund that would provide full-compensation buyouts at age 64 for these 700 workers. We estimate the average level of total compensation (wages plus benefits) in the industry, including that for executives, to be about $78,000 per year. This would amount to buyouts totaling around $55 million for the 700 workers per year. The federal government would need to pay for these buyouts.

We can apply comparable calculations for the 194,000 people employed in the oil and gas industry. Assuming that production in the industry will need to fall by roughly 40 percent within 20 years, about 900 workers per year will need to be supported through a full-compensation buyout when they reach age 64. The average compensation in the industry, again including the pay for executives, is presently around $120,000. This means that the total buyout package for the 900 64-year-old oil and gas workers will be about $108 million per year. The buyouts for workers in both the coal and oil industries total about $165 million per year—a remarkably modest sum.

In addition to workers directly employed in the U.S. coal, oil, and natural gas industries in all occupations, there are additional workers engaged in “support activities” for these and kindred industries. Providing fair retirement subsidies for these workers should also be readily manageable. As of the 2015 government figures, about 412,000 people were employed in all support activities for all U.S. mining and extractive industries. These include workers in management, professional jobs, manufacturing, construction, transportation, clerical jobs, and cleaning services. There are another 72,000 workers in the U.S. engaged in various petroleum-refining activities.

Most of these roughly 500,000 people—including workers employed in support activities as well as refining—will not be significantly affected through retrenchments in the fossil fuel industries. Among other factors, a high proportion of them are connected with sectors such as iron and copper mining rather than fossil fuel extraction. With refining, a large share are engaged in producing petrochemicals, as opposed to refined gasoline. Petrochemical production will not have to be cut as part of a clean energy transition, since it generates only negligible CO2 emissions. Still more significant, the expanding clean energy sectors will need to employ a large number of support workers to perform services similar to those needed for fossil fuel production.

It is difficult to calculate with precision how many workers employed in these support activities will be significantly affected by the decline in U.S. fossil fuel production. A high-end estimate would place these costs at being roughly equal to the costs of the buyouts for the directly affected workers—another $165 million per year. As such, a high-end estimate of total costs of providing buyout benefits at age 64 to all workers facing layoffs—as opposed to the natural progression into retirement at 65—would be about $330 million per year.

Guaranteeing Fully Funded Pensions

If our Just Transition program is going to rely heavily on workforce attrition through retirements at either age 64 or 65, then it is imperative that all affected workers have secure and decent pensions waiting for them upon retirement. Accomplishing this will be a major challenge. This is because most U.S. workers, both those working within the fossil fuel industry and more generally, have inadequate pension coverage.

U.S. workers finance their retirements through a combination of three sources—Social Security, their own private savings, and employer-based pensions. Individual savings are not nearly high enough to finance retirement. This is especially true in the aftermath of the 2007–2009 financial collapse. Most households have yet to recover from the nearly 30 percent decline in overall household wealth resulting from the crisis. With Social Security, the current average benefit is about $16,000, which is only slightly higher than the $15,300 threshold for food stamp eligibility. Meanwhile, about one-third of all private-sector workers had no access to retirement benefits from their employers.

Within this context, the most effective approach to guaranteeing adequate retirement support for fossil fuel industry workers would be provide such support to all workers, regardless of the industries that employ them. However, short of such an ambitious overhaul of the entire U.S. pension system, there are measures that the federal government will need to take to ensure pension security for the fossil fuel industry workers specifically.

At present, the main pension programs in both the coal and oil industries are already underfunded. The situation is most severe with coal. The industry’s pension funds are managed through the United Mine Workers of America Health and Retirement Funds, which covers multiple employers. But this fund has suffered from the rapid attrition of the coal industry and is currently underfunded by $1.8 billion. A February 9 Washington Post story reported that the coal miners’ fund has “rapidly declined as some coal companies shed dues-paying workers and others filed for bankruptcy protection. Without intervention, some of the funds—chiefly those associated with firms in bankruptcy—could run out of cash before spring.”anufacturing cities such as Detroit and Pittsburgh over the past three decades.

The Obama administration introduced an initiative last year called “Power Plus” that calls for more than $1 billion in spending for jobs training and economic development as well as additional funds to shore up workers’ pension and health funds. To date, this proposal has been blocked by the Republican congressional leadership. But even if a version of it were to pass, it is not clear that it would fully cover the current $1.8 billion underfunding gap.

This pension fund simply must be made whole. To prevent an even greater underfunding gap, the fund could be “frozen” at its existing level of commitments to workers. The fund would be closed to newly hired employees, but there are likely to be very few such new hires in any case, as the transition from fossil fuels to clean energy proceeds. The required policy intervention here—through Power Plus and any additional measures, as needed—would be for the federal government to ensure that the $1.8 billion gap is closed through a combination of commitments made by both the companies and the government.

As noted, the oil and gas corporations are currently at nowhere near the level of distress faced by coal companies. From 2009 to 2014, publicly traded companies in the industry reported $234 billion in profits, $147 billion in dividends, and $47 billion in share buybacks. They did lose $200 billion in 2015 as oil prices plunged. But they still managed to distribute $23 billion in dividends and $1.5 billion in share buybacks that year. At the same time, however, the five largest U.S. oil and gas companies by themselves—ExxonMobil, ConocoPhillips, Chevron, Devon Energy, and Anadarko—were carrying nearly $13 billion in unfunded pension liabilities as of 2014 and $14 billion as of 2015.

Given that the oil and gas industry will need to contract by between 30 percent and 40 percent over the next 20 years as part of the clean energy transition, we should expect that the companies are not going to prioritize replenishing their pension funds as a matter of course. The federal government will therefore have to mandate full funding. One way to enforce this would be for the Pension Benefit Guaranty Corporation (PBGC)—an arm of the federal government—to utilize its powers under the 2006 Pension Protection Act to prohibit the oil companies from paying dividends or financing share buybacks until their pension funds have been brought to full funding and then maintained at that level. As needed, the PBGC can also exercise its authority under the 2006 act to place liens on company assets when pension funds are underfunded.

Communities that are dependent on the fossil fuel industry will face formidable challenges adjusting to the decline of the industry. This will be true even if all workforce reductions can be managed through attrition by retirement and all pension fund obligations to retired fossil fuel workers are honored in full.

Large cities tied to the fossil fuel industry, such as Houston and Dallas, will unavoidably face big adjustments, similar to those experienced by major manufacturing cities such as Detroit and Pittsburgh over the past three decades. But smaller communities that are less diversified will experience still greater losses. Midland, Texas, a city of 120,000 residents, relies both on traditional oil and gas extraction as well as more recent shale oil projects to generate 65 percent of the city’s overall economic activity. Midland and its sister city, Odessa, were booming in recent years, with average real earnings in the fossil fuel sectors rising by an average of 22 percent between 2006 and 2014, due especially to the growth in shale oil extraction. But the area also experienced a loss of about 13,000 jobs in 2015—7.5 percent of the area’s overall workforce—as oil prices fell. Without an effective transition program, this pattern of decline will persist.

The situation is, again, still worse for coal-dependent communities. For example, in Boone County, West Virginia, 47 percent of all jobs in recent years were with the region’s coal industry. However, just between 2011 and 2015, coal-mining employment in the area fell from 4,600 to 1,400, a 70 percent decline. The county’s budget also fell 45 percent between 2012 and 2015. Since the beginning of 2016, the county has laid off 70 teachers and consolidated three elementary schools. Again, in the absence of a well-functioning transition program, this pattern will persist in Boone County and in similarly coal-dependent communities.

The U.S. can nevertheless advance viable readjustment programs that are capable, at least, of significantly softening the blows to be faced by Midland, Boone County, and many similarly situated communities. Accomplishing this will be a matter of political will.

To begin with, let’s recall that the decline of fossil fuel industries will be occurring in conjunction with the rise of the clean energy economy. In the 2014 study Green Growth, one of us (Pollin), along with co-authors, estimated that the overall annual public and private costs of a 20-year program to cut U.S. CO2 emissions by 40 percent would be about $200 billion per year. Of that total level of investment spending, Pollin and co-authors estimated the annual need for public spending at around $50 billion per year, or 25 percent of the total, with about $150 billion per year coming from private investments encouraged by public support. This combined level of public and private investments in clean energy projects should generate a net expansion of about three million jobs throughout the U.S. economy, even after we fully factor in the job losses in fossil fuel industries and related activities.

Within this broader clean energy investment program, policies can be designed so that regions with larger-than-average fossil fuel industries will receive generous support to advance regionally appropriate clean energy projects. For example, Texas and Wyoming could receive additional support to build wind-energy production projects. Initiatives along these lines have already begun. The Appalachian region could receive extra support for upgrading the energy efficiency of their building stock and electrical grid transmission system.

Previous federal programs can serve as useful models on how to leverage this wave of clean energy investments to also support fossil fuel–dependent communities facing transition. There are both positive and negative lessons on which to build. One example is the Worker and Community Transition program that operated through the Department of Energy from 1994 to 2004. Its mission was “to mitigate the impacts on workers and communities caused by changing Department of Energy missions.” This program, along with related initiatives, was targeted at 13 communities that had been heavily dependent on nuclear-industry jobs but subsequently faced retrenchment due to nuclear decommissioning. It provided grants as well as other forms of assistance in order to promote diversification for these 13 affected communities and to maintain jobs or create new employment opportunities. Appropriations for the program totaled around $200 million annually in its initial years, but became much smaller, in the range of $20 million, in the final years of operation.

A study by John Lynch and Seth Kirshenberg in 2000 provided a generally favorable assessment of the program. They concluded that “the 13 communities, as a general rule, have performed a remarkable role in attracting new replacement jobs and in cushioning the impact of the cutbacks at the energy-weapons complex across the country.” But as Lynch and Kirshenberg note, “The most serious problem facing the energy-impacted communities … was the lack of a basic regional economic development and industrial diversification capacity for most of the regions affected by the cutbacks.” To address this problem directly, community-assistance initiatives could encourage the formation of new clean energy businesses in the affected areas. One example of a successful diversification program was the repurposing of a nuclear test site in Nevada to what is now a solar proving ground. More than 25 miles of the former nuclear site are now used to demonstrate concentrated solar-power technologies and help bring them to commercialization.

It is not realistic to expect that transitional programs will, in all cases, lead to developing new economic bases that support a region’s previous level of population and community income. In some cases, the role of community assistance will be to enable communities, moving forward, to shrink to a size that a new economic base can support.

It is important to keep in mind that the extent of the overall community displacement that will result through the clean energy transition will be no greater than what the U.S. experienced after the end of the Cold War. Between 1987 and 1996, 1.4 million jobs were lost overall in the defense and aerospace industries, a 40 percent decline. San Diego and Philadelphia both lost around 50,000 jobs over this period, representing declines in both cases of about 6 percent of their respective workforces.

The federal government did advance substantial transition programs during this period, in particular through the Defense Reinvestment and Conversion Initiative, whose total funding amounted to more than $16.5 billion from 1993 to 1997, or about $4 billion per year. The 1999 study by Powers and Markusen found that these programs were adequate in terms of overall funding levels, at about $12,000 per displaced worker. Still, Powers and Markusen concluded that the program did not succeed in supporting the well-being of the individual workers and their communities. This was because the transition policies were primarily focused on providing support for the defense-industry contractors, through the promotion of mergers and the expansion of foreign weapons markets. The laid-off workers often did not find the assistance necessary to make satisfactory job and career changes.

Clearly, mounting a federal transition program, even if it is well funded, is not a solution in itself. The central challenge will be to effectively integrate these transition programs with the coming wave of public and private investments in energy efficiency and clean renewable energy and the millions of new job opportunities generated by these investments.

Overall Costs for Just Transition

The Just Transition program that we have sketched here will require significant levels of government spending in three areas. These include:

Retirements at age 64 with full compensation. Our high-end estimate for this, including workers employed in the relevant support and refining activities that are outside the fossil fuel industry per se, is $330 million per year.

Fully guaranteed pensions. As a high-end figure, the U.S. government will have to spend $1.8 billion to bring the United Mine Workers of America Health and Retirement Funds to full funding. This amounts to $90 million per year over 20 years. The figure can be lower to the extent that the coal companies can be made to contribute toward closing their underfunding gap. The oil and gas companies, by contrast, are still fully capable of closing their underfunding gaps. These gaps should therefore be handled through regulatory interventions.

Community transition. Working from the largely successful Worker and Community Transition program, the high-end level of support would be around $200 million per year. This would be in addition to the direct clean energy investment projects flowing into all regions of the country. Alternatively, if we use the less-successful Defense Reinvestment and Conversion Initiative as a financial model, that would imply spending about $12,000 per displaced worker, amounting to annual spending of around $150 million per year. Thus, a reasonable range for these programs is between $150 million and $200 million per year.

Combining these three policy areas, we approximate the total costs as being about $600 million per year over a 20-year transition period. This level of federal spending can be readily absorbed within the broader $200 billion annual U.S. clean energy investment program that we have sketched above, with direct public spending in this program at around $50 billion per year. The Just Transition program we are proposing, costing around $600 million per year, would amount to about 1.2 percent of the $50 billion in overall public spending needed to build a U.S. clean energy economy.

As one option, these funds could be generated through the savings the federal government would obtain through investments to raise efficiency standards by 30 percent in most of the buildings they own or lease, as stipulated by the 2007 Energy Independence and Security Act. These building-efficiency investments should save the federal government about $1.3 billion per year, or more than twice as much as would be needed for the Just Transition program. Beyond this, establishing a carbon cap or tax to discourage fossil fuel consumption could realistically generate about $200 billion per year. The total costs of the Just Transition program would therefore amount to about 0.3 percent of the revenues that could come from a carbon tax or cap.

In short, a Just Transition for U.S. fossil fuel industry workers is eminently affordable. It is also an imperative—both a moral and strategic imperative. It will be virtually impossible to move forward at the pace that is necessary for a clean energy transformation without making firm commitments to generously supporting the workers and communities that will be hurt by this transition. To again recall Tony Mazzocchi’s words, “Those who work with toxic materials on a daily basis … in order to provide the world with the energy and the materials it needs deserve a helping hand to make a new start in life.”